In modern American politics, citizens regularly expect the government to intervene in the economy. Small wonder that politicians from both sides of the aisle constantly promise to “create jobs” and “stimulate the economy” while on the campaign trail.

Once in office, politicians feel compelled to show something for their promises. As a result, government bureaucracies at every level of government pour public dollars into ill-advised interventions in the market. In North Carolina, a dizzying array of economic development programs wreaks havoc on the market and on our political institutions.

The trend towards economic development programs has even moved down to local governments. A quick search of nonprofits in North Carolina turns up 4,244 results with “development” in the organization’s name. Many of those organizations are taxpayer-supported, if not fully funded by public money. Most of these organizations promise to bring “economic development” to their target area. The Raleigh Business and Technology Center (RBTC), a “business incubator,” is a perfect example of why that doesn’t work.

The RBTC was started to offer reduced-rate services to minority-owned small businesses in Southeast Raleigh. Most reporting about the RBTC — including Civitas Institute investigations of mismanagement and corruption there — focused on misconduct at the organization. But even if you put all of that aside and imagine that the RBTC had been a squeaky-clean organization, it still would have been a bad program.

When the City of Raleigh contracted with the RBTC to provide business incubation services, it was effectively picking winners and losers in the market. This is because public funds subsidized RBTC beneficiaries’ overhead costs.

Take rent, for example. Businesses housed at the Raleigh Business and Technology Center paid only $1.50 per square foot of office space each month. Meanwhile, competitors in downtown Raleigh had to pay around $23.76 per square foot — $14.73 if they set up in the Triangle instead.

That gave any business housed in the RBTC a tremendous advantage over prospective competitors, since competitors in the same area would have to pay far more than what RBTC tenants paid in rent.

Add in the subsidized values of telephone services, Internet, janitorial services, conference rooms and business training, and the advantage becomes even more lopsided.
Government favoritism in the form of economic development programs creates an unfair advantage for some businesses and undermines the success of hardworking entrepreneurs who do not avail themselves of government handouts.

Far from “developing” the economy, this sort of government intervention stymies free competition and uses badly-needed public resources to elevate the private interests of a few cherry-picked businesses.
Government favoritism in the economy inevitably leads to another problem: cronyism. When government officials control the purse strings, it becomes profitable to befriend those people.

The previous example of the Raleigh Business and Technology Center’s rental rates helps to explain why this happens. Say you’re a small business owner. You don’t want to pay $23.76 per square foot each month for office space. But you realize that if you cozy up to a city councilman or a bureaucrat, you might end up paying just $1.50 per square foot each month.

As long as you end up paying less than the market price in the end, cronyism makes perfect economic sense. Economists call this sort of political jockeying by businesses “rent-seeking.” It’s why there is an army of lobbyists in Washington — and to a lesser extent in Raleigh.

The distorted set of incentives produced by government intervention also creates a different sort of public corruption: the “revolving door.” Matthew Mitchell, an economist at George Mason University’s Mercatus Center, describes it as “the tendency for ex-government officials to find jobs in the industries they once oversaw and for industry insiders to find regulatory jobs overseeing their former colleagues.” Now, why does that seem familiar?